BIG trouble in BIG China: Cisco shares fall off a cliff as CEO warns of slump

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Cisco's shares slumped ten per cent in after-hours trading on Wednesday after the networking kingpin copped to terrible performance in emerging markets.

The hardware giant squeezed $2.9bn in net income (up 11.6 per cent year on year) out of revenues of $12.1bn (up 1.8 per cent) in the third quarter of 2013. The company beat Wall Street's earnings estimates, but missing an expectation of $12.36bn for revenue.

What walloped the stock price, though, was weak guidance from Cisco chief John Chambers – who warned of a 10 per cent drop in sales in the next three months – on the back of a tough sell environment in its emerging markets.

Cisco's sales to emerging markets shrunk 12 percent from the previous quarter, following on from that period's 3 per cent fall in sales to Asia and a 6 percent slump in China.

Cisco chief John Chambers said on a call discussing the earnings that: "China continued to decline as we and our peers worked through the challenging political dynamic in that country."

Translation: China now has enough 'good enough' technology vendors like Huawei and ZTE that they don't need to buy from us any more.

China was the main anchor dragging down Cisco's emerging markets sales last quarter, so we reckon this is a continuation of that decline. Cisco had tried to prepare for this tough environment in the previous three months by canning 4,000 staff – a decision that may help future earnings, but has not done anything to stem the loss in this crucial market.

Wall Street got a further spook later on in the call when the company revealed that revenues could decline a whopping eight to ten percent in the next quarter as it faced an increasingly "challenging" environment.

Some of that innovation comes in the form of Insieme, which is Cisco's software-defined networking technology. Unlike most other SDN companies, Cisco is developing a product that closely couples its software to its hardware – a design method that runs contrary to the desires of big kit buyers such as Facebook, which have been compelled to build their "own" open gear in response to Cisco's shoring up of its traditional business. ®